Risk Management Sensitivity a Factor in Adopting Guaranteed Income

June 20, 2012 (PLANSPONSOR.com) - Some plan sponsors are
hesitant to implement an in-plan guaranteed retirement income solution for the
same reasons others are in favor of it.

Risk management sensitivities, workforce considerations and
paternalistic feelings are the biggest factors in determining whether a plan
sponsor will adopt this type of solution, Marc Pester, senior vice president of
Prudential Retirement Institutional Income, said during a PLANADVISER webcast
event sponsored by Prudential.

Risk Management
Sensitivities

Plan sponsors who are in favor of an in-plan guaranteed
retirement income solution think it will diffuse potential litigation about
benefit adequacy, Pester said. “When we look at that role of the DC [defined
contribution] plan today … there’s a need to address the risks associated that
may compromise benefit adequacy,” he added.

Participants who are nearing retirement often invest more
conservatively in fixed income or stable-value funds for fear of market
volatility, but this can lead to smaller market return that will cause a
longevity risk, Pester said. An income solution like a guaranteed minimum
withdrawal benefit can provide an income safety net and address the longevity
challenge, he added.

Plan sponsors who are against guaranteed income solutions
are concerned about the fiduciary implications. Many plan sponsors are waiting
for further clarity on the use of guaranteed income solutions. However, Pester
contends that if plan sponsors use the safe harbor provisions found in ERISA
section 404, they would not need to await additional guidance.

Safe harbor provisions paved the way for the success of
target-date funds, which Pester said had low adoption rates before this,
similarly to the resistance seen today in adopting guaranteed income solutions.
“The market basically said, ‘This is a fad,’” he said. “There was a general
view that this was not going to catch on.”

Plan sponsors are also concerned about fee-related
litigation exposure, but Pester contends participants are aware that fees for
protecting their income will be different than typical fees. “Knowing that you
have protection, knowing that you’re not going to run out of money … obviously
that becomes an important value that has to be part of the equation when you’re
measuring fees,” he said.